I will be sharing my opinions, and those of some others I respect, on how the investment business works, or fails to work, for the portfolio owner. My focus will be on portfolio construction or destruction depending on the topic of the day! Hopefully we can find a way to laugh at it all!

Saturday, February 21, 2009

Ignorant Money

WHERE THE IGNORANT MONEY GOES?

We hear a constant stream of discussion about what the “smart money” is doing? So I ask myself, given the mess the MBA’s and PHD’s have got us into, who exactly is ‘the smart money”?

According to the mainstream media and the talking heads on T.V., the smart money folks are exactly the same people who are currently wrecking our retirement and destroying our banking institutions.

Amazingly enough, these same folks are now suggesting the way to a renewed investment strategy and healthy retirement is to ask these same investment guru’s for a “second opinion”. (Anyone who knows the firm I work for will understand how much the “second opinion” ads grate on my nerves.)

The concept seems to be that retail investors bought our crap once so why not stick with it and screw the retail investor one more time! Unfortunately....it will work because confused investors are blindly seeking somebody, anybody, they can trust! Thus the “smart money” folks will lead the “ignorant money” into a grab bag of garbage products.

Ignorant Money: I use the term “ignorant in its truest sense to reflect “lack of knowledge”, not in the pejorative sense of ill mannered! Investors have been lead into high risk, over-priced, and in many cases totally unsuitable investments. The reason that happened was because Canadian investors are trusting when they should be dubious. Most lack the understanding of how advisors make money, and are exposed to the shifty investment industry. Without the quality regulatory oversight they mistakenly believe is provided by the self regulatory ‘boys club’ investors are unaware the regulator hides a corrupt/lazy/incompetent investment community from the light of day!

I pilfered the term “ignorant money” from a university professor who was speaking on BNN. He used it to explain the mass movement of money to poor quality investments. In short (my interpretation) he was talking about the money that blindly follows the marketing advice from the big banks and investment firms.

“Come and get a free retirement assessment from BIG Bank and you can rest easy!”, “Come and get a second opinion for free! From BIGGER Bank”, and my absolute favourite “It's time to look forward not backward and take advantage of the low market prices”.

I actually have a fantasy about honest ads from the big banks: “ Come and get a free assessment that will do you as much good as the last one you got from a bank for free!”, “You were stupid enough to trust us before, how about double or nothing on whatever money you have left”, “Don’t look back, we can’t afford to have you learn from your past mistakes!”.

THE FORECAST: In the next 6-12 months you will be overwhelmed with ads for the following products or products very similar to them.

Product: Segregated Mutual Funds: You will be told that getting your original investment back with no gain in 10 years is the best way to protect your money. For this privilege you will pay about 3% per year.

Ignorant Feature: With markets down 30-40% the guarantee is virtually worthless now. This makes some sense at the top of the market and absolutely no sense after a major market correction. Also most investors don’t have the 10 years to wait for the return of capital.

Product: High Yield Bonds: With government bonds paying next to nothing and investors too nervous to buy equities, advisors will focus on the corporate high yield bond market. You can get much higher yields and the protection of security with the bonds versus the common stock.

Ignorant Feature: People need to ask the big question, why is this bond paying such a high return? The answer is because the underlying firm is likely to go bankrupt, renege on its bond payments, or be unable to pay you back when the bond matures. High Yield means JUNK. A small amount in the portfolio might be acceptable for some, but look for major whacks of this stuff to find its way into portfolios of vulnerable seniors.

Product: Leveraged Loans: With stocks “on sale” it will be an absolutely amazing opportunity for investors to make a quick killing on the recovery by utilizing the brilliant strategy of leveraged investment loans.

Ignorant Feature: What could go wrong? I don’t know.....maybe we should ask Lehman Brothers or AIG, they are the most recent experts on leveraging. The key point to remember is that your advisor will make roughly 5% up front on your leveraged investments and have no monthly payments. The only way to make this work for the average investor is to write your CSC exam and become an advisor. Now the strategy is brilliant!

Product: Market Linked GIC’s (PPN’s): While these products have been a real mess, the banks just make too much money selling them. Confused seniors are still available and untrained bank staff can sell them with great sincerity since they do not actually understand the risks.

Ignorant Feature: Similar to seg funds, the guarantee is somewhat useless at the bottom of the market and the fees are ridiculously high. Most investors got killed on the “protection event” but in the next round it will be a straight fee grab.

Product: Lifecycle Funds: OK, your advisor was asleep at the switch and forgot that you might want to reduce your equity exposure as you approached 80 years of age and had only a small RIF to help sustain your meagre lifestyle. No problem, your advisor can buy a fund that will pay somebody to automatically rebalance and adjust the asset allocation as you get older. Phew, that’s a relief!

Ignorant Feature: About that lazy advisor you had? What is it you are paying them for again? In short, you are paying a premium to have your advisor fir e somebody to do the work you hired them to do, and you pay both parties.

Well, there you have it, my forecast of what you can expect to see on the shelf at your local investment market. The two things required to keep the markets alive are fees and uninformed investors to pay the fees. Inspite of the painful lessons of 2008, I predict 2009 will be a great year for advisors. They make money on greed, fear, and ignorance and all three are in abundant supply.

6 comments:

Agree with most everything you say, except perhaps the corporate bonds. Since ALL corporate bonds have substantially higher yields, out of line with the reality that unless another great depression occurs, in which case equities will go a lot farther south too, then a diversified fund of corporate bonds like the ishares XCB, may be a smart investment now. The smart money i.e. all the big institutions, has gone scared to the safety of government t-bills, creating an opportunity. If a few investment grade bonds do default the diversified basket will minimize the losses. Do you not trust bond rating agencies at all?

Not sure a lot of the "smart money" moves come from a talking sales pitch Mike.Sites like Raymond James are much more likely to promote stupid money moves although in fairness the advertising video was down so I could not hear any of the commentary.

C.I.: I agree that corporate bonds are a good bet if well diversified and researched. The fear is that investors will be sold corporate bonds that were discovered through running a screen for highest yeild. Too many investors have high yeild/junk bonds that are ticking time bombs because the yeild reflects the distressed financials of the company. Not all higher yeilds are equal! I fully agree that there is sfety in numbers and thus diversified indexes make sense.

My favourite "smart money" advisors are the Economists who show up on TV. The interviewer ask them to tell us dummies what they see happening in the next year, and then we all listen to the crap coming out of the economists' mouths like it actually might be predictive. I think that all economist giving interviews should be forced to show an interview from 18 months ago just before today's interview. I'm thinking those economists would run for the hills rather than face up to what they said 18 months ago. And that would certainly leave more time for those beer commercials we like so much... n.